May 22, 2000 2:00 PM PDT

Can funding help Napster survive amid legal troubles?

With a new chief executive and a bank account flush with fresh venture capital funding, the future for controversial music-swapping software firm Napster has brightened.

Napster has been on the Silicon Valley VC radar for some time, but the company had been stamped "handle with care" because of pending litigation with the recording industry over alleged copyright violations, as well as lingering doubts about its long-term business strategy.

Today's $15 million investment round, led by blue chip venture capital firm Hummer Winblad, will no doubt help the small company finance its legal battles. Terms of the deal were not disclosed.

Perhaps more important than the money is the appointment of a new CEO, Hummer partner Hank Barry, who has roots in the record industry and could provide a critical bridge to the forces doing their best to nail Napster's corporate coffin closed.

Barry will have his work cut out for him. Napster's enemies have stepped up their legal rhetoric in recent weeks. And today, an influential Washington think tank proposed new copyright laws that could undermine Napster's service.

Citing the software's massive popularity, the company's new backers say they are confident they can navigate these tricky waters and cultivate a profit-making venture, however.

"I think we will build bridges to the record industry. But not just to the record industry," Barry said in an interview today. "I suspect that this will evolve into something that everyone can support."

Napster is at a critical crossroads in its short history. It has attracted the avid support and daily use of millions of fans who use the service to swap their MP3 music collections online. But as yet, the company hasn't found a way to make money from those millions of people.

Moreover, a large number of them appear to be trading songs illegally, an activity that has prompted lawsuits from the Recording Industry Association of America (RIAA) and artists Metallica and Dr. Dre.

The company is caught between those potential constituencies, hoping to build bridges to corporate America while retaining the credibility that has made it an underground icon.

Napster wildfire In one step apparently aimed at assuaging some record company fears, Napster last week added support for Microsoft Windows Media files. Microsoft has touted its technology as a way to allow secure digital downloads that won't produce the kind of widespread piracy seen with MP3 files.

A spokesman said today that the investment and management change does not represent an immediate shift in direction. Barry will lead the drive in developing a new business model, but the existing software will still be free, a company representative said.

"They are still going to continue looking for a business model of file sharing on the Net that will benefit all users, artists and fans," spokesman Dan Wool said.

The addition of Barry to the management team brings needed experience from both sides of the technology-entertainment divide, a gap that has so far proved too wide for the young company to bridge. The former entertainment lawyer has represented A&M Records and Liquid Audio, a downloadable music company that worked out its own legal issues with the record industry years ago.

Some possible business models have emerged from Napster's competitors. Scour.net, which provides a service similar to Napster's through its Exchange software, has signed a deal to become the exclusive Net distributor for an upcoming Miramax film trailer.

Also encouraging to the young firm was a recent poll of college students, which found that more than 50 percent of Napster users there said they would be willing to pay a $15 monthly fee for access to the service.

That could provide Barry with ammunition to propose subscription models to the big record companies. But Napster still will have to deal with its existing legal problems, which are looming larger as acts such as Metallica and Dr. Dre turn up the heat on the company.

Last week, Dr. Dre and Metallica's attorney said his clients aren't yet interested in settling, particularly if Napster can't enforce a ban on the trading of their songs. Both bands have asked Napster to block hundreds of thousands of people who allegedly have traded their copyrighted songs through the service but say they don't expect this tactic to be wholly effective.

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"Ultimately this is to show courts that there is no effective way of protecting copyright, except to shut Napster down," Los Angeles attorney Howard King, who represents both bands, said in an interview last week.

Pressure is also building in Washington to modify the recently passed Digital Millennium Copyright Act in ways that may not be good news for Napster.

The Progressive Policy Institute, an arm of the centrist Democratic Leadership Council, today asked Congress for rules that would force Napster to collect hard information on its members, such as real names, which would allow the industry to track down pirates. It also proposed rules that would more easily allow judges to shut down Net services that are "substantially used for copyright infringement."

"The debate over Napster shows that the danger to artists and record companies comes not from innovation, but from companies and individuals using the technology in illegal ways," said Robert Atkinson, director of the Institute's technology project. "Napster takes copyright infringement to a new level--it's Internet piracy on steroids."

All of these issues will mark steep hurdles for Barry and Hummer Winblad, as they try to help the company get to the point where they can make a return on their investment. The company would not disclose how much of the $15 million came from Barry's firm or how much control the venture capitalists have been given.

Barry and partner John Hummer also will join Napster's board of directors, however, giving the firm a substantial voice in Napster's future direction.

Current interim CEO Eileen Richardson, also a venture capitalist, will immediately step into an "advisory" role, the company said.

 

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